October 23, 2015 [OPIS] - In spite of numerous disappointments in earnings results for 3Q15, Kinder Morgan Inc. (KMI) approved another hike in the quarterly dividend from 49cts in 2ndQtr to 51cts for the 3rdQtr. The latest hike keeps the company on track to meet the full-year dividend target of $2.00 per share promised at the beginning of the year.
The company paid out a total of $1.74 per share during 2014, so if they make it to $2.00 a share in 2015, that will be a 15% increase year on year.
For purposes of YOY comparisons, the headline income number emphasized by CEO Steve Kean is “segment earnings before DD&A and certain items.” Going by that metric, 3rdQtr performance was just fine, with KMI’s five segments delivering $1,839 million in operating earnings, compared to $1,827 million in the previous quarter, 2Q15, and $1,856 million a year ago, 3Q14.
But one doesn’t have to scroll down far in the voluminous tables of the 16-page
earnings release to spot signs of trouble. With oil prices half what they were a year ago, the center of KMI earnings weakness is the CO2 segment devoted to enhanced oil recovery (EOR) in the Permian Basin.
If you stay with earnings before DD&A, CO2 segment earnings dropped 22% YOY from $363 million in 3Q14 to $282 million in the latest quarter. But there is one of those “certain items” lurking in the CO2 results: a $165 million non-cash, pre-tax impairment for the Goldsmith CO2 flood (Ector County, Texas, near Odessa). When you factor in certain items for both years, CO2 “segment EBDA” plunges 93% from $388 million (3Q14) to $29 million (3Q15).
Leaving CO2 out of the picture, the rest of the divisions delivered very solid results. YOY comparisons in segment earnings before DD&A are $975 million in natural gas pipelines, flat with $978 million a year earlier, $287 million in refined product pipelines, up 29% from $222 million, and $263 million in terminals, up 6% from $247 million in 3Q14.
Looking to summarize overall corporate results for 3rdQtr, we think perhaps the best number is the total tally for segment EBDA, which declined $500 million from $2,097 million in 3Q14 to $1,592 million in 3Q15, down 24%. Another measure would be Earnings before taxes and certain items, which dropped 28% from $739 million to $533 million.
Like every public company in the midstream gas sector, KMI’s stock has been coming down hard since the end of the upward flutter of oil prices in the spring. The Alerian MLP Index, a widely used benchmark for the midstream sector, is down 23% from 433 at the end of May to 332.84 at the close on Oct. 21. Over that same 4.5-month period, KMI stock came down 24% from $41.49 to $31.42 at yesterday’s close, almost matching the benchmark.
Mexico turns out to be the main bright spot across the range of KMI’s far-flung operations. In commenting on KMI’s dominant segment, Steve Kean summarized, “Growth in [natural gas pipelines] was led by contributions from the Hiland acquisition and improved performance on the El Paso Natural Gas Pipeline, driven by demand from Mexico.”
Highlighting this strength, KMI announced yesterday that its Texas Intrastate Gas Pipeline Group executed a contract with Comision Federal de Electricidad (CFE), Mexico’s national electric utility, to provide 527 MMcfd of firm transportation beginning June 1, 2016.
Delivery point indicated for the new gas volumes is “Nueces County,” which almost certainly means the Agua Dulce gas hub. KMI plans $76 million capex to boost capacity of its many pipelines around Agua Dulce to increase delivery capability in the area. Agua Dulce is the origination point for the Los Ramones system, a 42-inch giant intended to move 2.1 Bcfd into Mexico’s industrial heartland. The northern spread of the system, NET Mexico, is already in service from Agua Dulce to the border.
